U.S. stocks fell following a bond selloff that sent yields to multi-year highs. New filings for unemployment fell unexpectedly to near 49-year lows.

The benchmark 10-year U.S. Treasury yield rose to near 3.2%, climbing to a seven-year high. The 30-year yield hovered above 3.3%.

Equities competing for capital fell accordingly, and major U.S. indices tumbled Thursday afternoon. The Dow (^DJI) fell as much as 331 points, while the S&P 500 (^GSPC) slipped 1.1%, or 32.33 points at 1:08 p.m. ET. The Nasdaq (^IXIC) was down 2%, or 160 points.

Could someone clarify what is meant by this news? Or point me to appropriate reading?

1 Answer
1

First let's look at the bond market sell off. Bond prices move inversely to interest rates. So when interest rates go up, bond prices go down. Why? Because a bond paying 2% is worth less when the interest rate moves up to 4%, so the price of the old 2% bond will fall until the effective yield (based on the new price) is equal to the new interest rate. The Fed has been raising rates, so bond prices are falling.

So why did stock prices fall? Well, bonds have been paying very little so investors have been buying stocks since the overall yield on them was better than bonds. But now that risk free US government bonds are paying more, investors are selling stocks to buy the new bonds.